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Can You Spot the Trend Here?

Even after the last three years of one crisis after the next, Americans still seem hell bent on protecting their current standard of living and their emotional state instead of dealing with reality.

The Wall Street Journal ran a story yesterday on the indebtedness of seniors. No doubt this story was meant to give readers a sense of how the economic downturn has hurt elderly people in the U.S. It did this by pointing out how these people are carrying debt and are suffering… how their retirement plans are being scuttled by market crashes every other quarter.

But see if you can spot the trend…

Three Families… All Struggling to Make Ends Meet

The article describes a married woman who takes out big loans for her son’s college education. Then she gets divorced, pays off the loans, buys a condo… then borrows from her retirement savings to cover her daily expenses and credit card payments. She eats out less, but is putting woefully little toward retirement. Her financial advisor is very concerned. She’s 59.

Then there’s the couple that’s struggling with two mortgages and payments on their daughter’s student loan. They intended to sell “the big house” in town, but the bottom fell out of housing, so they can’t cash out for profit. So, they have cashed out of good investments to finance their daily living needs.

Another couple does well financially, but when they lost the ability to rent in their current neighborhood they took on a big mortgage in order to stay in the area. Why did they do this? They wanted continuity for their young son. Their financial advisor has urged them to cut back.

Do you see the trend here?

That’s right! There’s no motivation to make the sacrifices necessary to reign in their financial excesses and actually live within their means. Instead, there is a tremendous desire to maintain their current living standard, even if it negatively affects their future.

This is exactly what happened during the last decade when American consumers accumulated a whopping $42 trillion on private debt.

The Path Forward is One of Austerity.

We and the rest of the developed world went through a period of fantasy where debt was piled upon debt in order to finance a standard of living we couldn’t otherwise afford.

The endgame is that we must now pay that debt off or we must default, lose our credit worthiness, and let lending institutions write it off. Neither of which is fun.

As this occurs, standards of living must fall. It doesn’t matter how much people want it to be different, or how much they argue that the government should make it different. The situation will not change.

A period of deleveraging is upon us, and it will take its toll.

People will have to spend less. The less they spend, the less companies will need to produce. The less companies produce, the lower their turnover. Lower turnover means fewer job positions. More unemployment means people spend less. And so the vicious cycle gathers pace.

That’s why, in this kind of environment, cash flow is king.

Traditional equity investing becomes a loser’s game because stocks will continue to trend downward as the must-happen deleveraging takes place. That said, there are the occasional stocks that will trend up more than down as demographic trends push them forward. More importantly, these stocks are dividend payers, and this generates cash flow. We have recommended two such stocks in the Boom & Bust core portfolio.

Another way to build up your cash flow is to find short term investments that play fast moves in the market.

Bottom line: while Baby Boomers, like the ones described in the Wall Street Journal article, fight a losing battle against austerity and deleveraging, look to boost your investment portfolio with strong, dividend paying investments and short term plays that will help you generate a steady stream on income.

“Market bubbles are often a mass delusion, where investors wrongly assume that prices move in only one direction – UP! And nowhere is this delusion clearer than in real estate,” says economist… Read More>>

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.